Delaware Update on "Spring-Loaded" Options
On August 15, 2007, the Delaware Chancery Court, Chancellor Chandler, in a case called In Re Tyson Foods, Inc. Consolidated Shareholder Litigation, refused to dismiss a complaint alleging breach of fiduciary duty for granting so-called "spring-loaded" stock options.
("Spring-loaded" stock options are options priced at fair market value on the date of grant, but granted immediately before or close in time before the release of good news, which can be expected to drive the price of the stock up, making the options more valuable. "Bullet dodging" stock options, in contrast, are options granted at fair market value, but immediately after the release of bad news, after the market has marked down the value of the stock to take into account the bad news.)
Chancellor Chandler's recent decision reaffirms his earlier decision that under certain circumstances the grant of spring-loaded options can constitute the breach of fiduciary duty.
The practical implication of this decision? Boards should evaluate their stock option grant practices to make sure that they are above reproach in terms of their timing and pricing to avoid the arguments made in the Tyson case. In the words of Chancellor Chandler: "[I]f a board of directors candidly discloses why and when it awarded options, and accounted for them in a lawful manner consistent with the actual facts, the board has, absent unusual circumstances, insulated itself from fiduciary liability for misleading investors or regulatory authorities. What the directors would remain subject to was a well-pled claim that the compensation awarded was actionably excessive because, for example, it involved self-dealing and was not fair to the corporation."
